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March Newsletter

Personal Wealth and Finance


Financial Planning and Your Net Worth

September 1, 2018

Have you ever emptied your clothes closet to find out that you own more clothing than necessary while some items are out of date and some you will never wear? It is essential to assess your financial net worth and your ability to retire with an income, just as it is to establish how many shirts you need in your fashion repertoire. Your annual net worth statement is the benchmark measure of your ability to become financially independent. Net worth means the same as net assets – the assets you have left in your financial calculation after subtracting your liabilities.

Why do this annually? Time waits for no one while retirement approaches faster than we may realise. Consider how quickly the last five years have passed.

How can I know? Just add up your liabilities compared to your assets. Subtract your total liabilities from your total assets. This will give you your net worth – either positive or negative. The following chart will help you create a spreadsheet to do your calculation.

List_of_Assets

Here is why preparing your net worth statement is smart.

1) You gain awareness of your debts. Debt totals warn against spending beyond our means. Compound interest on a growing credit card debt at 18 to 28% can strain your cash flow. Always set goals to reduce debt.

2) Your net worth adds the value of your investments. Your net worth statement reveals all of your accumulated assets, including your RRSP and non-registered investments, putting them all into perspective. You may find that you need to rebalance your investments. You will also see which are performing well, suited to portfolio growth. While employed, make retirement income goals and see how close you are getting each year.

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3) It reveals opportunities for further financial solutions. Picture each financial need in contrast to your net worth snapshot. What have you saved for each future goal? Where has your income been going? Do you have home equity built up or do you still have a jumbo mortgage? Determine what your goals are. By assessing your net worth, you can allocate specific percentages of your money need to various needs such as paying down credit cards.

4) Estate & tax planning can affect your final net worth. To draft a will, you need to know your final potential net worth. Capital gains tax liabilities or tax on a vacation property should be identified. Your registered monies (RRSP/RRIF) will be fully taxed after the death of the second spouse (in most cases). Assess the final estate tax liabilities on your assets now. Consider that life insurance offers the most natural and best-timed solution for projected estate-related tax debts.

5) Business planning can be enhanced.  If you own a business succession planning simplifies the transfer of a family’s business assets to the next generation. Often a simple life insurance planning manoeuvre can ease the effect of capital gains tax or provide for a future buy-sell agreement upon the death of the principal business owner. In this way, you might be able to maximise the value of your net worth even after your decease for the benefit of your heirs!

 

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